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Key Points:

With the official cash rate historically low at 3.5 per cent, Deborah Carlyon, financial adviser at Stuart + Carlyon, advises investors and borrowers to think carefully about to how to benefit.

I'm retired and my bank interest income has halved to 4 per cent. What other interest-bearing options are there?

Companies borrow money by issuing bonds to the public. Bond holders get interest ahead of shareholders' dividends and their money back at maturity so the return is predictable. You can buy existing investment-grade bonds (ie, low default risk) issued by companies at around 6 per cent a year for six years. An example of a new issue is a six-year Fonterra bond offering a minimum of 7.75 per cent a year. You should always consider the viability of the company before investing.

Are there higher rates of investment income?

Higher returns mean more risk. But with some of your money you could own companies and share in the profits via dividend payments. During the current economic uncertainty, share prices are 40 per cent cheaper, which makes pre-tax dividend yields higher than normal NZ-listed property trusts (14 per cent), NZ shares (9 per cent), Australian shares (6 per cent) and overseas shares (4 per cent). Look for companies with low debt and good cash flow. Even

if they reduce their payments during these recessionary times, dividend cheques provide good returns while you wait for share prices to go up.

I have a $300,000 fixed rate mortgage at 9 per cent for another year. Is it worth paying the break fee to secure a lower rate at 5.95 per cent for five years?

When you break a contract, banks charge the difference between your loan rate and the new rate the bank will earn on its money. So if they charge you 3 per cent up front, you could add the fee to your loan balance and you will be better off, primarily because you have the certainty of a low rate for five years. Check the numbers with your bank. Of course interest rates may still be low if you wait out the year. You decide how important certainty is. If you re-fix and keep payments the same, you'll repay the mortgage faster.

I have spare money I can save. With mortgage rates so low, should I repay the home loan first or should I invest?

Repaying the mortgage is low risk. To beat this strategy, you will need an after-tax return higher than 5.95 per cent. KiwiSaver works as the Government and employer contributions effectively top up fund returns. If you've already sorted KiwiSaver, then investing into local and overseas shares at current cheap prices could provide 9 per cent a year after tax over the next 10 years (income and growth). But share returns can vary wildly at times so you need to be comfortable with risk.